With the opening of Cathay Pacific’s own cargo handling terminal next year, Will Waters asks Mark Whitehead, MD of Hactl, what the future holds for Hong Kong’s biggest air cargo handler.
It is the end of an era for Hong Kong and for Hactl in particular, as the largest customer of the largest handler at the world’s largest international cargo airport prepares to migrate to its own 2.6 million-tonne-capacity terminal.
Cathay Pacific and sister airline Dragonair will move to the new CPSL (Cathay Pacific Services Limited) terminal next door during 2013, beginning just after Chinese New Year in a phased programme expected to take around nine months. If all goes well they should be out in their entirety by September 2013.
“They make up anywhere between 40% and 45% of our volumes at the moment, depending on how the cargo market is at the time, so it’s a game changer,” acknowledges Hactl MD Mark Whitehead. “But the current shareholders knew the deal when they purchased the shares, so that was obviously reflected in the purchase price of the shares. Things have gone pretty well in terms of how well Hactl has performed, and so everyone is all right with the model and the way things are working.”
When Cathay tendered for the new third terminal in Hong Kong five years ago, its parent company Squires was advised to sell its shares in Hactl under the terms of the shareholder agreement, and that has since happened. There are now four shareholders: Jardine Matheson with 42%; port operators Hutchison and Wharf Holdings each owning around 21%; and the fourth shareholder is CNAC, the Chinese quasi-government entity that has close links with all the mainland carriers.
Although Cathay will cease to be a customer of Hactl and will, ultimately become a competitor offering third-party services to other airlines, both companies have taken the view that cooperation is the best way to approach the transition process.
“From a Hactl point of view, this is about HR,” says Whitehead. “What we have to worry about is how we service their business until such time as they choose to leave, and we obviously need to retain people and they obviously need us to retain people while they are still with us. And at the same time we have a significant labour shortage at the airport, and for the expertise that they require in terms of supervisors and those kind of people, there are two obvious places where they can get that: ourselves and AAT. So we’re working very hard with them and have had lots of sensible discussions on how to handle the labour side.”
The first stage of the nine-month transition is expected to see Cathay take a very small amount of cargo into the new terminal from 1 February, just to get things moving. Once they are comfortable with these operations, they will move the whole import operation over, and then, at a later stage, exports.
“They are quite rightly taking a cautious approach, wanting to make sure that all the systems are up and working before moving onto the next stage,” observes Whtehead. “The new terminal is not too dissimilar to Hactl; it’s highly mechanised and highly dependent on IT, and I know from my own bitter experience that if the IT system breaks down, it’s really a very uncomfortable position to find yourself in, because you can’t find the cargo. So these things have to work.
“We’re contractually bound to continue providing services to Cathay until the end of 2013, so they have the flexibility, which is why this HR issue is so interesting, because instead of them moving everything over in September they could decide that they needed more time to get a system running properly delay to December.”
If there is such a delay, the same staff that were scheduled to move across with Cathay at that time will instead stay with Hactl, until such time as Cathay wants to move that part of the operation over.
“For the first time in my life I think we are looking at a situation where the redundancy package may be to keep people not to get rid of them,” muses Whitehead. “In this situation, yes we may have to make people redundant but it’s a very tight labour market and they will have a job starting the next day, which we will arrange for them.”
In addition to managing a smooth handover, Whitehead says he has two priorities: “One of the key things for me is to downsize Hactl so that its cost base is absolutely right. But my number one priority is to make sure it’s business as usual for all of my other carriers, and that they are properly served and don’t even notice, and that again comes down to labour. If customers get concerned that all the people they have been dealing with are going to be leaving, that is a worry, so we’ve got to avoid that.”
Cathay’s new CPSL terminal has a design capacity of 2.6 million tonnes, to which Cathay and Dragonair will take about 1.2 million or 1.3 million tonnes. “My expectation is that their first priority for at least 12 months will be to make sure that they are absolutely on top of their own business and that it is running well,” suggests Whitehead. “There are so many examples where terminals open with major problems. After that my expectation is that they will open for third-party business.”
He believes Cathay will be a “very sensible competitor”, both in terms of its approach to the market and to recruiting staff. “I don’t think they’ll be just trying to attract people by offering extra money. But we will have a situation in Hong Kong where there is surplus capacity for the foreseeable future, and that usually has an impact on the market, including on price.”
However, Whitehead believes that it would be petty to support a third runway at the airport in order to help expand its capacity and at the same time to oppose the third cargo terminal.
“It doesn’t work like that,” he says. “Every time you bring new capacity on to prepare for the future there is a period where there is excess capacity, until the generic growth comes through to fill that gap. If you look back to 1998 when we opened the Super Terminal 1, we started off with 1.2 million tonnes
Whitehead says he is still working on the amount of downsizing needed to match the volumes that Hactl will have, but stresses that in an increasingly competitive environment, cost base is extremely important.
“Now that doesn’t mean we will go around slashing jobs; we are going to do what makes sense, because the number one thing, which is metaphorically tattooed on everyone’s forehead, is that our other customers are kept happy, as that is the way to retain customers. Cathay will have some advantages; but we have to make it so that people will say to themselves ‘why would I leave this company when I have had 35 years of excellent service from them’? If you provide the levels of service, there are natural barriers, because why would anyone want to change something when it is not broken? The problem comes if something is broken, and then you get people saying ‘well, why don’t we try this other provider across the way’?”
With unemployment in Hong Kong effectively zero, meaning that anyone that wants to work can work, there is an argument that labour could ultimately be a limiting factor on the real cargo capacity of the airport. But Whitehead dismisses this.
“If you need staff, you’ll get them somehow,” he says. “For this particular sector there has never being labour coming in from north of the border, but Hong Kong is a very pragmatic place and if the government believed that we are losing business because of a lack of people, and it wasn’t just us whining because it is a bit difficult, things would facilitate that,” he explains.
“The younger people in Hong Kong obviously prefer slightly cushy jobs, and ramp handling at the airport in the summer is not a cushy job, so at job fairs people not queuing up to become a ramp handler,” he observes. The sector is also not the most highly paid, so people rely on lots of overtime.
“But retaining the people at Hactl is not one of the issues I have on my mind; I’m confident I can do that,” Whitehead insists. “We strive to be the employer of choice, and we do a lot of training; we do a lot of people development.”
Whitehead says he doesn’t know how Cathay is going to play the pricing market between airline and handler, but his experience is that Cathay is not a company that goes around offering rock-bottom prices. He says he also does not worry himself about pricing, because that is set by the market. “So, the only thing you can do is get the service right, because that’s your differentiator,” he says. He says airlines are naturally looking for the right price, but they can’t afford to take big risks with service standards, because quality for a cargo carrier happens on the ground.
“If you have bad service on the ground, the cargo will be with their competitor tomorrow,” he says. “My experience as well is that, whatever anybody says, the premium between one carrier and another is not really very much, is not material. We don’t set the market, so if there is lots more capacity, the usual thing is that you’re going to have price reductions, and then you have to take the view that you are in this market and want to keep the customers, and you try and retain them. You try and negotiate a bit of a premium because you think you’re better, but it’s usually not material, and then it’s about maximising the amount of cargo that gets on those planes − and making sure that it is not left in the hangar!”
So, with Hactl set to lose a big chunk of its market share, what about the prospects of expanding the Hactl ‘brand’ outside of Hong Kong, in order to diversify?
One option is some form of consultancy role; the second option would be consulting plus the use of Hactl’s ‘Cosac Plus’ terminal operating system; the third option would be those two plus an equity investment.
“We have people that looking into these three areas,” says Whitehead. “This is something we have not done much in the past, not through lack of opportunity, and. Others have obviously been there, such as Menzies, Swissport, and Dnata.”
Hactl has done some consultancy in the past and is currently looking at various opportunities. However, Whitehead doubts that there will be much call for equity investors, since that is not usually the challenge that airports and cargo handlers in developing markets face, and he also believes the opportunities for specialist handlers to spread their experience globally are sometimes overstated.
“Our experience is relatively narrow,” he says. “We are the best in the world at operating a terminal with 2.9 million tonnes of cargo in a year – nobody else has done that. What we are good at is running highly automated cargo terminals with heavy reliance on IT, highly complex in terms of the number of carriers – we have got more than 100 carriers, which involves lots of interface problems.”
But when people from other countries come to him with problems, which they assume Hactl can solve for them because of what it does so well in Hong Kong, it is not always so simple. “For example they might have huge customs problems or corruption problems; how are we going to solve that? Or getting people to work in incredibly bad conditions; how can we solve that problem better than anyone else can? Of course we can help them with design problems and layouts, but a lot of the problems that these ground handlers have around the world are very specific to their geographical location, and a Hactl, why are we better placed than anyone else to solve them? So there are obstacles,” he observes.
But he believes the company’s Cosac Plus product has some very interesting potential. “We spent a lot of money developing that and we are working with a couple of very interesting major companies now to determine whether they can take that product and use it without a high degree of customisation. We designed and built it as a modular system, so we believe they can do that, but we are now putting that to the test. If it satisfies the IT procurement experts at these companies, this would be fantastic, and then we could share that with other people. So there is maybe some significant potential there.”
But Whitehead insists that his main focus must be on its core operations.
“My number one priority is to make sure that Hactl in Hong Kong does its job under its franchise agreement, and that we continue to be the best ground handler that there is and to continue to evolve and do things better ? and keep customers happy. People say you will have this extra space when Cathay moves out, and that’s true: for a period of time there will be extra space. But if we all believe in the upward line of growth expected for China and Hong Kong, it will fill quickly.”
In the mean time, Hactl’s cross-border trucking subsidiary, Hacis, has always been constrained by a lack of space. “And so that is an obvious area for us to use some of our surplus space,” he says.
There are also other ways that Hactl can adapt to its new post-Cathay era.
“We are looking at several other things. For example, the amount of perishables air cargo is going up all the time,” says Whitehead. “Hactl can handle any level of volumes there, but we are also looking at how we can handle that even better; for example there is a large and growing market for lobsters, so we are looking at how we can cut down on lobster fatality rates. So there are a whole bunch of things we can do.”
